1. (SBU) SUMMARY. Mission Germany recommends that Germany
receive the same treatment in the 2007 301 Report as it
received in 2006 and not be listed in the priority watch list
category. The situation facing American pharmaceutical
companies in Germany has not appreciably deteriorated during
the past year. The German government is currently
implementing a wide-scale health care reform. It is too
early to evaluate how this reform will impact American
pharmaceutical companies, and unfair to prejudge this
legislation before it is implemented. An amendment to the
law on pharmaceutical reference pricing system was passed in
2006, addressing some industry concerns about disparate
treatment for generic and patented pharmaceuticals. The
amendment attempted to clarify the procedure by which drugs
can be listed as innovative. U.S. industry maintains that
Germany's reference pricing system continues to unfairly
discriminate against U.S. companies. While we remain
concerned about the government's referenced pricing system
and its impact on U.S. industry we are improving our dialogue
with the German government to educate them regarding the
impact of these regulations on the pharmaceutical sector and
the role of innovation in Germany. We believe this dialogue
is bearing fruit and the situation has not appreciably
deteriorated over the past year to warrant Germany's
placement on the priority watch list. END SUMMARY.

2. (SBU) PhRMA's Special 301 submissions for 2006 and 2007
are very similar, reflecting the fact that the situation for
PhRMA in Germany has not appreciably changed during the past
year. PhRMA raises concerns about the impact of pending
health care reform legislation. However, post deems it
inappropriate to judge the German government on legislation
that has not yet been implemented and whose impact on the
pharmaceutical industry remains unclear.

3. (SBU) During the past year, the German government passed
the Health Cost Containment Act, which did address some of
PhRMA's concerns. The act, which went into effect on April
1, was the first major amendment to the Fixed Referenced
Priced System instituted in 2004 and clarifies the process
for deciding which drugs are truly innovative, and thus
exempt from reference pricing. For the first time, it also
imposes a mandatory 10% rebate on generics, which will affect
mainly German manufacturers and addresses PhRMA's complaint
that the law unfairly favors generic drugs (mainly of German
origin) at the expense of patented drugs (mainly of U.S.
origin). The law also requires the government to develop
rules clearly defining innovative drugs. These rules are
intended to make the process for declaring which drugs are
innovative more reliable and transparent. While the
amendment also contained measures criticized by industry, we
believe it is an attempt by the government to address
industry concerns and try to improve legislation on reference
pricing. We have asked industry to document their concerns
over specific decisions of the Joint Federal Committee of
Doctors and Sick Funds and inform of the Embassy of any
applications for innovative drugs that were denied. During
the past year, we have received no such information from any
member of PhRMA.

4. (SBU) The Embassy has continued to engage with the German
government on the need for transparency in the process of
determining innovative drugs. Deputy Secretary of Health and
Human Services Alex Azar visited Germany in February 2006 and
met with German officials and industry to discuss the need
for innovation in the pharmaceutical sector. The Ambassador
and other USG officials have met repeatedly with the
officials from the ministries of Health and Economics to
discuss our concerns. German Health Minister Schmidt
traveled to the U.S. several times in 2006 to gather more
information on the U.S. approach to cost containment and
innovation in the health care sector. USTR is proposing to
head a delegation in the spring of 2007 to visit Germany to
continue this dialogue.

5. (SBU) We have continue to concerns regarding the impact
of the German reference pricing system for pharmaceuticals on
U.S. industry. But we believe that placing Germany onthe
priority watch list could have a damaging impact on our
ongoing discussions with Germany on the need to foster a
climate for innovation in the health care sector. The German
government has addressed some industry concerns over the past

BERLIN 00000371 002 OF 002

year. It is also up to industry to test the provisions of
the amendment to the reference pricing system to see if
Germany has made its system of declaring drugs innovative
more transparent and fair. It also remains to be seen
whether the impact of new health care legislation will be
detrimental to the American pharmaceutical industry. Such
concerns warrant further monitoring and a continued dialogue,
not punitive measures.
TIMKEN JR

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